The Overtime Rule: What Employers Need to Know

Approximately 4.2 million employees are expected to benefit from the new overtime rule that goes into effect on December 1, 2016. Here’s what employers need to know about the new overtime regulations.

What is the Overtime Rule?

The final overtime rule raises the salary threshold for overtime eligibility from $455/week to $913 ($47,476 per year). What this means for employers is that if you have an employee that makes less than $47,476 ($913 a week), then he or she automatically qualifies for overtime pay when they work more than 40 hours per week.

In accordance with the Fair Labor Standards Act (FLSA), employers are required to pay at least a minimum wage for up to 40 hours per week and to pay overtime for hours in excess of 40; however, many workers who perform executive, administrative or professional duties (“white-collar” workers) and make between $23,660 and $47,476 are currently exempt from overtime pay rules. The final overtime rule ensures white-collar workers who make less than $913 a week automatically qualify for overtime pay, when they work more than 40 hours per week.

What is the Effective Date?

The final overtime rule goes into effect on December 1, 2016. This means that, starting on that date, regular employees paid less than $913 per week will be eligible for overtime time for any hours worked in excess of 40. Further, the exemption salary threshold for highly compensated employees (more on this below) rises to $134,004 per year.

Future automatic updates to salary threshold amounts will occur every three years, beginning on January 1, 2020. The Department of Labor will publish all updated rates in the Federal Register at least 150 days before their effective date, and also post them on the Wage and Hour Division’s website.

Are All Businesses Affected by the New Overtime Regulations?

Nearly all businesses are affected by the overtime regulations; however, different rules apply to outside sales workers, computer employees, teachers, academic administrative personnel, physicians, lawyers, judges and motion picture industry employees. Because the overtime regulations fall under the FLSA, only businesses with gross annual sales of $500,000 or that are engaged in interstate commerce must comply with the new overtime rule.

How Does the New Overtime Rule Affect a Highly Compensated Employee (HCE)?

The final overtime rule sets the HCE total annual compensation level equal to the 90th percentile of earnings of full-time salaried workers nationally ($134,004 annually).

To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $913 per week on a salary or fee basis and pass a minimal duties test. The HCE annual compensation level set in this final rule brings this threshold more in line with the level established in 2004 and will, in the view of the Department of Labor, avoid the unintended exemption of large numbers of employees in high-wage areas who are clearly not performing executive, administrative or professional duties.

Are Commissions or Bonuses Included in the Salary Calculation?

Up to 10 percent of total compensation meeting the salary threshold amount can be in the form of bonuses or commissions. Prior to the new rule, employers were not permitted to count these forms of compensation toward meeting the minimum salary threshold for overtime.

Employers will now be able to use non-discretionary bonuses and incentive payments such as commissions to satisfy up to 10 percent of the standard salary level. For employers to credit non-discretionary bonuses and incentive payments toward a portion of the standard salary level test, payments must be made on at least a quarterly basis. It is the employer’s discretion when the quarter will begin (i.e. not necessarily a calendar quarter).

Example: You pay an employee $821.70 per week, and s/he also receives a bonus of $1,186.90 every quarter. The base pay plus the bonus (an average of $91.30 per week over the 13 weeks in a quarter) is equivalent to paying your employee a salary of $913 per week.

The final rule also allows an employer to make a “catch-up” payment. Catch-up payments are made when an employee doesn’t meet their sales quota in a given quarter (and doesn’t earn their expected quarterly commission) but exceeds a sales quota during the next quarter. In this case, an employer is able to make a catch-up payment and avoid paying overtime compensation.

Example: Let’s say your employee typically earns a commission of at least $1,500 every 13 weeks (quarter). You pay the employee a weekly salary of $821.70 (90 percent) and anticipate applying the 10 percent bonus commission ($91.30) toward the total salary requirement of $913 per week. However, the employee doesn’t meet his sales quota and only earns a commission of $1,000 or $76.92 per week, which is $14.38 less than required to meet the $913 per week requirement. In this example, employers are allowed to make a catch-up payment in the next quarter of $186.94 ($14.38 x 13 weeks) to maintain the employee’s exempt from overtime status.

Nondiscretionary bonuses. A form of compensation promised to employees, for example, to induce them to work more efficiently or to remain with the company.

Discretionary bonuses. The decision to award the bonus and the payment amount is at the employer’s sole discretion. For example, a previously unannounced holiday bonus qualifies as a discretionary bonus, because the bonus is entirely at the discretion of the employer, and, therefore, could not satisfy any portion of the standard salary threshold level of $913 per week.

Note: For businesses that pay employees large bonuses the amount attributable to the standard salary level is capped at 10 percent of the required salary amount.

Nondiscretionary bonuses and commissions continue to count toward the total annual compensation requirement for highly compensated employees ($134,004) as long as the HCE receives at least the full standard salary amount each pay period ($913).

What are My Options as an Employer?

While the new overtime regulations don’t specify exactly what actions employers need to take, there are a number of ways that employers can comply including:

• Increasing workers’ salaries so they are exempt from the overtime salary threshold
• Paying the mandatory time-and-a-half for overtime hours in excess of 40 hours per week
• Limiting workers to 40-hour work weeks, so there is no overtime
• Reducing base salaries, but paying overtime with the goal of keeping weekly pay the same
• Using a combination of the above

Are you Ready for the new Overtime Rule?

The best way to prepare for the new overtime rule is to understand how it works and how it will affect your business and your employees. Please call our office if you have any questions or need assistance complying with the new regulations. Help is just a phone call away!